Solution Manual for CFIN 3 3rd Edition by Besley

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Solution Manual for CFIN 3 3rd Edition by Besley

Solutions

CHAPTER 6

6-1 Calculator solution: Input N = 20 = 10 x 2, PV = -598.55, PMT = 25 = 50/2, and FV = 1,000,

compute I = 6.0 per six months.

YTM = 6.0% x 2 = 12.0%

6-2
1 − 1 12   
Vd = 50 
(1.07 )
 + 1,000  1 
 0.07  12
 (1.07 ) 
 
= 50(7.94269 ) + 1,000 (0.444012 ) = 397 .1345 + 444 .012 = 841 .15

Calculator solution: Input N = 6 x 2 = 12, I = 7, PMT = 50, and FV = 1,000, compute

PV = -841.15.

 1− 1 N 
Vd = PMT  + M ;
(1+r )
6-3 r = YTM
 r  (1+ r)N
 

M = $1,000
INT = 0.095($1,000) = $95
N = 28 years in 2012
Vd = $1,165.75

Calculator solution: Input N = 28, PV = -1165.75, PMT = 95, FV =1000; compute I = 8.00% =
YTM

6-4 Return = [($925 - $1,000) + $80]/$1,000 = 0.005 = 0.5%

Current yield = $80/$1,000 = 0.08 = 8.0%

Capital gains = (-$75)/$1,000 = -0.075 = -7.5%

Total return = Current yield + Capital gains = 8.0% - 7.5% = 0.5%

6-5 The bond is selling at a large premium, which means that its coupon rate (C) is much higher
than the going market rate of interest (rd).

With a calculator, enter N = 60 = 30 x 2, PV = -1,353.54, PMT = 70 = 140/2, and FV = 1,000;

compute I = 5.10

The actual periodic, or six-month, rate is 5.10 percent, so the nominal YTM is 2 x 5.10% =
10.2%. This would be close to the going rate, and it is about what Tapley would have to pay
on new bonds.

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Solution Manual for CFIN 3 3rd Edition by Besley

6-6 a. and b. Coupon = 5%, thus INT = 0.05 x $1,000 = $50 per year, $25 per payment
(semiannual)
Bond’s value one year ago, when seven years remained until maturity:

Calculator solution: N = 7 x 2 = 14, I/Y = 6/2 = 3, PMT = INT = 25, FV = 1,000;

PV = ? = -943.52

Bond’s current, when six years remain until maturity:

Calculator solution: N = 6 x 2 = 12, I/Y = 4/2 = 2, PMT = INT = 25, FV = 1,000;

PV = ? = -1,052.88

Capital gains yield = ($1,052.88 - $943.52)/$943.52 = 0.1159 = 11.59%

Current yield = $50/$943.52 = 0.053 = 5.3%

Total return = 11.59% + 5.3% = 16.89%

Alternative solution:

Total return = [$50 + ($1,052.88 - $943.52)]/$943.52 = $159.36/$943.52 = 0.169 = 16.9%

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